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Part 9-2: Responding to the Sec. 965 “transition tax”: From the “Pax Americana” to the “Tax Americana” (cont)

This is a continuation of the post “Part 9: Responding to the Sec. 965 “transition tax”: From the “Pax Americana” to the “Tax Americana”
cross-posted from citizenshipsolutions by John Richardson

The first portion of the post was published here.
Links to the first eight posts in my “transition tax” series are listed at the bottom of this post.

Part D: Citizenship and the expansion of Empire – Ancient Rome

As described by Andrew Henderson of Nomad Capitalist, in 212 AD the Roman Emperor Caracella expanded Roman citizenship by bestowing Roman citizenship on all free men. A listing in Wikipedia suggests that:

The Roman jurist Ulpian‘s Digest stated, “All persons throughout the Roman world were made Roman citizens by an edict of the Emperor Antoninus Caracas” (D. 1.5.17).

The context of the decree is still subject to discussion. According to Cassius Dio, the main reason Caracalla passed the law was to increase the number of people available to tax. In the words of Cassius Dio: “This was the reason why he made all the people in his empire Roman citizens; nominally he was honoring them, but his real purpose was to increase his revenues by this means, inasmuch as aliens did not have to pay most of these taxes.”[2] It should, however, be noted that Cassius Dio generally saw Caracalla as a bad, contemptible emperor.

Another goal may have been to increase the number of men able to serve in the legions, as only full citizens could serve as legionaries in the Roman Army. In scholarly interpretations that followed a model of moral degeneration as the reason for the fall of the Roman Empire, notably the model followed by Edward Gibbon, the edict came at the cost to the auxiliaries, which primarily consisted of non-citizen men, and led to barbarization of the Roman military

Clearly Rome was not the last empire to associate “citizenship” with “taxation”.

Part E: Empire and taxation: As goes taxation, so goes civilizations

As the late Charles W. Adams wrote in his classic book – “For Good and Evil: The Impact Of Taxes On The Course Of Civilization” – the evolution of civilizations is a function of the tax policies of the civilization. Presumably as “civilizations expand into empires”, the tax policies of an empire are more likely to expand beyond the borders of the nation and into other nations. What the United States calls “citizenship-based taxation” (making it seem patriotic) is really the policy of imposing “worldwide taxation” on the “tax residents” of other countries. It is explainable as a part of the creation and expansion of empire. FATCA is the way that the American Empire has forced other nations to (1) impose U.S. taxation on the residents of those countries and (2) force those other countries to bear the cost of so doing.

Canada is probably the number one victim of U.S. “extra-territorial taxation”.

Part F: Public Perception of Empire

Former Canadian Liberal Leader Michael’s Ignatieff writing on American Empire – 2003

Former Canadian Liberal Leader Michael Ignatieff was a Harvard Professor when he was recruited by the Federal Liberals to return to Canada and lead the Liberals from the “waste land” to the “promised land”. Mr. Ignatieff was kind of a “public intellectual” who quickly learned that the “hard knocks” of political life were harder than the comforts of his academic appointments. In any case, Mr. Ignatieff recognized American Empire and wrote a fascinating article about it (which appeared in the New York Times in 2003 just prior to the Bush invasion of Iraq.) It’s a fascinating article. Well worth the read. It includes:

America’s empire is not like empires of times past, built on colonies, conquest and the white man’s burden. We are no longer in the era of the United Fruit Company, when American corporations needed the Marines to secure their investments overseas. The 21st century imperium is a new invention in the annals of political science, an empire lite, a global hegemony whose grace notes are free markets, human rights and democracy, enforced by the most awesome military power the world has ever known. It is the imperialism of a people who remember that their country secured its independence by revolt against an empire, and who like to think of themselves as the friend of freedom everywhere. It is an empire without consciousness of itself as such, constantly shocked that its good intentions arouse resentment abroad. But that does not make it any less of an empire, with a conviction that it alone, in Herman Melville’s words, bears ”the ark of the liberties of the world.’‘

In other words, the United States is a country that believes that all of its policies, actions and ambitions are cloaked in righteousness simply because it is the United States.

Part G: Empire and taxation: If you were to ask your friends the following question:

Q. Do you think that the United States would impose more punitive taxation and compliance requirements on: (1) U.S. citizens living in the United States or (2) certain Canadian citizens living in Canada?

A. The probable answer would be: Don’t be absurd. Of course the United States imposes more punitive taxation on U.S. citizens living in the United States than on Canadian citizens living in Canada.

Wrong! Wrong! Wrong!

To put it simply: The Internal Revenue Code of the United States imposes taxes, sanctions and penalties on certain Canadian residents that are not imposed on Homeland Americans at all. The point its is that “non-residents” are subjected to a harsher set of U.S. tax rules than are U.S. residents.

I know the answer to this question. I filed one year using TurboTax (and a host of paper filings since TurboTax falls way short of being sophisticated enough for a foreign return) and it had a helpful function at the end where you could compare your US tax liability against others in a similar income band. My US tax liability was 2.5x the average bill in the same income band. That’s not 2.5% but 2.5x. My “fair share” was more than twice as much for the same level of income as the homelander “fair share”.

Thankfully, the out of pocket cost was limited by the taxes I had already paid in the UK. But, it shows the cost of not living a life optimised for the rules of the US tax system can be enormous. If you live in the US, there are tax no brainers. If you live in the UK, there are tax no brainers. But if you’re subject to both systems at the same time, you can’t benefit from the tax no brainers since, by and large, the other country takes what the other giveth.

As I’ve said before, the US tax system includes on the basis of citizenship but excludes on the basis of physical location since participation in the tax no brainers is limited by things like US source earned income which you can, generally, only get when you live in the US.

Q. How does the U.S. tax bill of a U.S. tax subject living OUTSIDE USA (@taxresidency in another country) compare to U.S. tax bill of a U.S. tax subject living INSIDE the USA? A. Hard to believe but, non-US residents mostly taxed more than U.S. residents! https://t.co/JwGs5Ru37k

Ironically, this is a prime example of “upside down” territoriality. Under a territorial approach, such as, residency-based taxation, the taxpayer is expressly not taxed on foreign income. Here, the taxpayer – say, an American abroad – for sure will be fully taxed on foreign income, whereas his or her cousin in the States who earns domestic business income will enjoy the 20% deduction.

Part H: 12 examples (in addition to the “transition tax”) which U.S. residents can “laugh about” and Canadian citizens can/should “rage about”:

1. Templeton Mutual Fund bought in the U.S. by a U.S. resident is NOT subject to PFIC confiscation. The same mutual fund (with exactly the same securities) bought in Canada by a Canadian resident is subject to PFIC confiscation. Furthermore, the Canadian resident is required to report his ownership in his Canadian mutual fund on Form 8621 – check it out here.

2. A U.S. resident who invests in a ROTH IRA has automatic “tax deferral” and is not subject to U.S. taxation. A Canadian resident who invests in an equivalent TFSA does not have “tax deferral” and is subject to U.S taxation on the income on TFSA even though he is not subject to taxation on the income in Canada.

3. A U.S. resident who invests in an ABLE plan (Achieving a Better Life Experience Act) has automatic tax deferral. A Canadian resident who invests in an RDSP (equivalent “special needs plan”) is subject to U.S. taxation on that income. Furthermore, the Canadian resident is required to report his ownership of his RDSP on Form 3520 – check it out here.

4. A U.S. resident who invests in a S. 529 “education plan” has automatic tax deferral. A Canadian resident who invests in an RESP (equivalent “education plan”) does not have “tax deferral” and is subject to U.S. taxation on that income. Furthermore, the Canadian resident is required to report his ownership in his RESP on Form 3520 – check it out here.

6. A U.S. resident is not required to report his local U.S. bank accounts to U.S. Financial Crimes. A Canadian resident is required to report his Canadian bank accounts to U.S. Financial Crimes. This is a very special category of “form crime” -see information about Mr. FBAR.

7. A U.S. resident is not required to report his U.S. financial assets annually to the IRS on Form 8938. A Canadian resident may be required to report his Canadian financial assets annually to the IRS on Form 8938. Form 8938 is an extremely intrusive, time consuming form. Check it out here.

8. A U.S. resident is NOT required to treat his activities in the USA as foreign and subject to penalties and reporting. Certain Canadian residents are required to treat their business activities in Canada as foreign and subject to penalties and reporting. Check out Form 5471 and From Form 8865.

9. A U.S. resident married to a U.S. citizen spouse is allowed to make unlimited gifts to his spouse. A Canadian resident married to a Canadian citizen spouse is NOT allowed to make unlimited gifts to his spouse. Furthermore, the Canadian resident is required to report certain gifts to his spouse on Form 709 – check it out here.

11. The TCJA includes a provision that allows U.S. residents to deduct property taxes on their U.S. principal residences, but specifically does NOT allow a Canadian living in Canadian to deduct property taxes on his Canadian principal residence.